7245 - Inventory Cost Flow and LCNRV

CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
FINANCIAL ACCOUNTING AND REPORTING VALIX/VALIX/SANTOS

MAY 2024 CPALE BATCH 95
INVENTORY COST FLOW AND LCNRV
1. An entity provided the following data relating to an inventory item:
Units Unit cost Total cost
Jan. 1 Beginning balance 5,000 200 1,000,000
10 Purchase 5,000 250 1,250,000
15 Sale 7,000
16 Sale return 1,000
30 Purchase 16,000 150 2,400,000
31 Purchase return 5,000 150 750,000
I. The cost of January 31 inventory should be reported at P2,650,000 using FIFO approach.
II. The cost of January 31 inventory should be reported at P2,785,600 using weighted average approach.
III. The cost of January 31 inventory should be reported at P2,550,000 using moving average approach.
IV. The FIFO inventory method reports most closely the current cost of inventory.
a. All statements are true
b. All statements are not true
c. Only two statements are true
d. One statement is not true
2. An entity has two products in the inventory.

Product Aye Product Bee
Selling price 2,000,000 3,000,000
Materials and conversion costs 1,500,000 1,800,000
General administration costs 300,000 800,000
Estimated selling costs 600,000 700,000
I. The inventory should be reported at P3,200,000 under LCNRV.
II. In most situations, entities measure inventory under LCNRV on a total inventory basis
III. Net realizable value is estimated selling price less estimated cost to complete and cost of disposal.
IV. LCNRV of inventory is always either cost or net realizable value.
a. All statements are true.
b. Only three statements are true
c. All statements are not true
d. Only one statement is true
3. On December 31, 2024, an entity experienced a decline in the value of inventory resulting in a writedown
from P4,000,000 cost to P3,200,000 net realizable value. The entity used the allowance method to record
the necessary adjustment. In 2025, market conditions have improved dramatically. On December 31,
2025, the inventory had a cost of P5,000,000 and net realizable value of P4,400,000. The entity made
purchases of P25,000,000 in 2025.
I. Under the allowance method, the ending inventory is recorded at cost and any loss on inventory
writedown is recorded separately.
II. Under the direct method, ending inventory is recorded at the lower of cost or net realizable value
and any loss on inventory wriedown is not recorded separately.
III. The gain on reversal of inventory writedown should be reported at P200,000 for 2025.
IV. The cost of goods sold for 2025 should be reported at P24,000,000.
a. All statements are true
c. Only statements I, II and III are true
d. Statement III is not true.
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4. Based on a physical inventory taken at year-end, Chewy Company determined the chocolate inventory
on a FIFO basis at P5,200,000 with a replacement cost of P4,000,000. The entity estimated that after
further processing costs of P2,400,000, the chocolate could be sold as finished candy cars for P8,000,000
with normal profit margin is 10% of sales.
Using the measurement at the lower of cost and net realizable value, what amount should be reported as
chocolate inventory at year-end?
a. 5,600,000
b. 4,000,000
c. 5,200,000
d. 4,800,000
5. An entity determined the following information for an inventory at year-end.

Historical cost 2,000,000
Current replacement cost 1,400,000
Net realizable value 1,800,000
Net realizable value less normal profit margin 1,700,000
Fair value 1,900,000
What amount should be reported as inventory at year-end?
a. 1,400,000
b. 1,700,000
c. 1,800,000
d. 1,900,000
6. On December 1, 2024, an entity entered into a commitment to purchase 100,000 barrels of aviation fuel
for P55 per barrel on March 31, 2025. The entity entered into this purchase commitment to protect itself
against the volatility in the aviation fuel market.
By December 31, 2024, the purchase price of aviation fuel had fallen to P50 per barrel. However, by
March 31, 2025 when the entity took delivery of the 100,000 barrels the price of aviation fuel had risen
to P53 per barrel.
I. A liability should recognized at P500,000 on December 31, 2024.
II. The gain on purchase commitment should be recognized at P500,000 in 2025.
III. The purchase on March 31, 2025 should be recorded at P5,500,000.
IV. The credit balance that arises when loss on purchase commitment is recognized should be presented
as a current liability.
a. All statements are true.
c. Only statement II is true.
d. Only statements I and IV are true
7. During the current year, a real estate developer purchased a tract of land for P90,000,000. Additional cost
of P15,000,000 was incurred in subdividing the land during the year. Of the tract acreage, 70% was
subdivided into residential lots and 30% was conveyed to the city for road and a park.
The subdivided lots were classified into 100 Class A with sale price of P1,200,000 per lot, 100 Class B
with sale price of P800,000 per lot and 200 Class C with sale price of P500,000 per lot.
What amount of the total cost of the land should be allocated to Class A lots?
a. 42,000,000
b. 36,000,000
c. 22,500,000
d. 26,250,000
End
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CPA REVIEW SCHOOL OF THE PHILIPPINES

FINANCIAL ACCOUNTING AND REPORTING VALIX/VALIX/SANTOS

2. An entity has two products in the inventory.

5. An entity determined the following information for an inventory at year-end.

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